Trading start-ups to merge as profits too low

LONDON (Reuters) - A raft of start-up trading platforms in Europe are struggling to make money as they scramble for market share and consolidation looks increasingly likely, market participants said this week.

It is impossible to make money on the trading business because margins are too low, several companies told the Reuters Exchanges and Trading Summit, and they need other services such as dark liquidity pools to make a profit.

Chi-X Europe, the first pan-European equity multilateral trading facility (MTF), went live in March 2007, aiming to take on Europe's three major exchanges with its faster and cheaper trading engine.

"We always thought that when Chi-X launched in 2007 there would be consolidation in about five years, so about 2012. With markets as they are ... we believe that date may come forward," said Charlotte Crosswell, president of U.S.-Swedish exchange Nasdaq OMX Europe, one of the new breed challenging Europe's centuries-old bourses.

MTFs like Nasdaq OMX Europe (NDAQ.O), Nomura Holding's (8604.T) Chi-X and Turquoise, which is backed by nine investment banks, have sprung up due to changes in European Union financial regulations allowing them to challenge the likes of the London Stock Exchange (LSE.L).

The Markets in Financial Instruments Directive or MiFID, the cornerstone of Europe's single capital market, came into effect in November 2007 and aims to tear down barriers to pan-EU trading and increase investor protection.

"It's a long haul but the prize is pretty great, if you can get a 20 percent share of Euronext, Deutsche Boerse or London and others, that's an attractive prize," Crosswell told the Reuters Trading and Exchanges Summit in London.

But the explosion of new entrants has led to a price war among the MTFs.

"The problem is the MTFs are not teetering on profitability. They are teetering on making next to nothing. So who do you consolidate with?" said Richard Balarkas, chief executive of agency broker Instinet.

Average revenue per trade in the industry has dropped to as low as 10 cents from 20 cents a few quarters ago.

Artur Fischer, CEO of Equiduct, a unit of Germany's Boerse Berlin, said the industry's cost base of between 7.5 million euros and 12 million euros would mean an alternative trading platform needs to trade 100 million shares a year to break even. Current trading levels for most of the MTFs are well below this level.

As they move into new areas to boost profitability, MTFs may become more attractive to potential partners.

Pan-European equity trading platform Turquoise is considering adding derivatives to its trading platform and planning to set up a broker-dealer business, Chief Executive Eli Lederman said.

Turquoise is still loss-making but Lederman expects the company to break even by the end of the year.

Other operators have opted to move into dark pools, which allow banks and institutional investors to execute big orders anonymously to limit market impact.

Nasdaq OMX on Monday launched its dark pool which trades more than 800 securities, while U.S. broker Nyfix pushed out a dark-pool equities trading platform, Euro-Millennium, in March 2008.

(Additional reporting by Steve Slater and Douwe Miedema; editing by Elaine Hardcastle)